UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DO FIRM CHARACTERISTICS MATTER IN CAPITAL STRUCTURE DECISION? AN EMPIRICAL STUDY OF LISTED FOOD PROCESSING COMPANIES IN VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By DINH THI THU Academic Supervisors: Dr. NGUYEN TRONG HOAI Mr. NGUYEN XUAN THANH HO CHI MINH CITY, October 2014 TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT The aim of this paper is to explore the firm-specific factors that affect the capital structure of food processing companies listed in Vietnamese stock exchange. The paper firstly reviews theories of capital structure: trade-off theory, pecking-order theory and other related empirical studies.
Seven factors are thereinafter concluded and discussed in the studied model in respect of correlations and the determinants of capital structure by using panel data procedures for a sample of 41 food processing companies listed on the Vietnamese Stock Exchange during the period of 2007-2012. Pecking order theory dominates in explaining financial decision of these firms. There are differences between the determinants of long-term fund-raising and short-term fund-raising. Profitability, size, tangibility, earnings volatility and liquidity are found statically significant to short-term leverage whereas tangibility and earnings volatility is the most important factors impacting the long-term leverage.
Empirical findings suggest some policy recommendations for sustainable development of the private sector in Vietnam. Keywords: Capital structure; leverage; food processing; Vietnam listed companies; panel data TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENT Studying is a long and interesting journey. It would be more interesting if you have a chance to get to know the talented people and learn from them. This paper could not have been completed without support from my supervisors, friends and family.
I would like to convey profound appreciation to Dr. Nguyen Trong Hoai, Mr. Nguyen Xuan Thanh and Mr. Truong Dang Thuy for their guidance in conducting this thesis.
My special thanks go to Mr. Nguyen Xuan Thanh for his valuable guidance, critical comments and warm support which made this work possible at the crucial stages. To my family and friends, my sincere gratitude for their unconditional love, support, and encouragement. TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS CHAPTER 1.1 Capital structure definition.2 Capital structure theory .1 The trade-off theory .2 Pecking Order theory .3 Comparative look on capital structure theories .4 Empirical evidence on determinants of capital structure .1 Empirical evidence around the world .2 Empirical studies in Vietnam.
OVERVIEW OF FOOD PROCESSING SECTOR IN VIETNAM. CAPITAL STRUCTURE DETERMINANTS – HYPOTHESES .4 Non-debt tax shields. Methodology AND DATA. Methods of estimation.
42 ii TIEU LUAN MOI download : skknchat@gmail. Analysis of the correlation among variables. 59 iii TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIRGURES Figure 1. Conceptual framework for firm-level determinants of capital structure………….37 LIST OF TABLES Table 1.
Market capitalization of Vietnam’s stock exchange (2004 – 2012)………. A summary of selected studies on determinants of capital structure in Vietnam…. Output and export contribution of food processing sector……………………. Number of enterprises manufacturing food and beverages by size of employees and capital resources.
Some financial indicators of Vietnamese enterprises……………………. Summary of determinants of capital structure: theory and measurement. Summary statistics of sample variables…………. Correlation coefficients among variables and VIF coefficients….
Results of Hausman tests for Model 1, 2 and 3……………………………. Estimation results of firm-level factors impacting on total leverage, short-term leverage and long-term leverage using FEM…………………….…………………………48 iv TIEU LUAN MOI download : skknchat@gmail.1 Research background Vietnam is a developing country in Southeast Asian region with total area of 331,210 square kilometers and population of over 91 million. Recovering from the war damage and the rigidities of a centrally-planned economy, the country has become among the fastest growing economies over the past decades thanks to the Doi Moi reforms in 1986. During this period, the private sector has emerged as one of the most important driving forces in Vietnam’s economic development.
The Enterprise Law in 2000 is conceived as a remarkable milestone for development of the private business in Vietnam. This law mainstreams the registration and operation of private companies, implements a regime of property rights and guarantees equal treatment among economic sectors. As a result, the period of 2000-2005 witnessed a boom in private sector development. It is estimated that 160,672 private enterprises were registered with a total combined capital of US$20 billion during the period of 2000-2005, which is 3.2 times more than the total number of private enterprises registered during 1991- 1999.
The private sector has played an increasingly important role in job creation, poverty reduction and economic growth. Vietnamese private enterprises annually contribute about 42% to overall GDP and provide 56.3% of the country's regular job supply. Nevertheless, these private firms have been facing many challenges in their existence and competition. One of the biggest challenges is financial capacity.
The majority of Vietnamese firms are small-sized in terms of labor and capital. More than 90 percent of the local businesses are small and medium enterprises. These firms have been facing tough competition from foreign companies in technology and financial capacity. Vietnam joined the WTO in 2007 following a long negotiation process of more than ten years and became the member of Trans-Pacific Partnership trade agreement in 2010.
These turning points have brought both opportunities and challenges to Vietnamese firms. They have chances to compete in the international market and expand their markets via goods export. On the other hand, they also face tough competition from foreign companies when these firms have a free access to the Vietnamese market. To compete with foreign firms, the local ones need to keep high TIEU LUAN MOI download :1skknchat@gmail.com quality products and services with lower costs.
It is noticed that many Vietnamese firms have recently gone bankruptcy due to two important reasons. First, firms could not sell their products. Second, they faced capital shortage problem. The first reason can be explained by the current global crisis in which the demand for products declines in attempts of cutting cost.
The second reason of capital shortage is identified as the top constraint in almost every survey on private small firms in the country. Vietnam is characterized by a bank-based economy where banking sector is the main source to finance the economy activities. Financial liberalization has progressed by several reform policies. In 1998, Vietnam’s financial system was strengthened and readdressed toward a more market-oriented approach when the Law on the State Bank of Vietnam No.01/1997/QH10 and Law on Credit Institutions No.02/1997/QH10 came into force.
The reform has led to a significant increase in total credit granted to the domestic private sector by the state-owned commercial banks in the following decades (World Bank, 2005). However, the private sector still gets less preferential access to banking credit than state-owned enterprises (SOEs). Most small businesses continue to finance their operations through retained earnings or informal sources of credit. The recent global financial crisis together with macroeconomic instability due to rapid credit growth has forced Vietnamese government to pursue a tighter monetary policy.
Vietnamese banks are required to adopt conservative credit policies in 2011. As the result, local firms have limited financing resources for their operation and investment and face with bankruptcy. Several local firms have chosen alternative channels for capital mobilization such as bond market or stock market. Vietnam bond market: Vietnam bond market is in a nascent stage even though its formation dated in the early 1990s.
Local currency bonds are mainly issued by the government or government sponsored institutions such as Vietnam Development Bank, Vietnam Bank for Social Policy and Vietnam Expressway Corporation. According to Vuong and Tran (2010), the overall bond market accounts for about 15% of the total GDP in comparison with the average percentage of 65% in East Asian region. The corporate bonds, 92% of which have maturities of 1-3 years, are traded on both HOSE and HNX and account for 1. Currently, primary market for corporate bond is weak while the secondary market is virtually nonexistent.
Vietnamese companies, TIEU LUAN MOI download :2skknchat@gmail.com most of which are small- and medium- sized, would hardly raise fund for their operations through the bond market. Vietnamese stock market: The historical development of Vietnamese stock market can be traced back with the establishment of Ho Chi Minh Stock Exchange (HOSE) in July 2000 and Hanoi Stock Market (HNX) in March 2005. Starting with five listed companies in 2000 with market capitalization of 0.2% of GDP, the number of listed companies increases to 311 in the year of 2012 with market capitalization of more than 21% of the country's GDP. Even though Vietnamese stock market has nowadays become an increasingly important channel for medium and long term capital, it is still far from international standards in terms of market size and market capitalization.
Market capitalization of Vietnam’s stock market (2004 – 2012) Total of listed Market capitalization of Market capitalization of listed Year domestic listed companies (US$) companies (% of GDP) companies 2004 26 248.036,47 21,14 (Source: World Bank) The Vietnamese stock market has been facing fundamental weaknesses that need to be resolved properly. During its development, Vietnamese stock market experienced high volatility. For example, in the period 2006-2007 there was a boom in this market due to over-expectation of the country’s economy growth and WTO accession. Market capitalization in 2007 reached 25,24% of GDP.
Affected by the global financial crisis, Vietnamese stock market took a deep plunge in 2008: VN-Index fell down sharply and TIEU LUAN MOI download :3skknchat@gmail.com market lost around two-third of its value when foreign investors withdrew their investment from Vietnamese stock market. The root weakness relates to dismal transparency, predictability and information clarity for investment decisions. Many listed companies frequently adjust their business results. Annual reports do not provide much useful information for investors and the discrepancy before and after auditing are large.
With high information asymmetry, investors have to bear the brunt when punishment for these practices is not strong enough. Moreover, information on the macro-economy is unpredictable and uncertain. Consequently, the Vietnamese stock market can only attracts short-term and unstable funds instead of long-term players such as retirement funds, public savings funds and becomes a playground for day traders or hit-and-run investors. Despite the above-mentioned weaknesses, Vietnamese stock market still plays an increasingly important role in the national economic development with the increasing numbers of listed companies and becomes the second important channel in capital mobilization.
Vietnamese firms can choose debt finance via the banking system or raise equity in the stock market. Therefore, it is worthwhile to study the financing practices of the listed firms on Vietnamese Stock Market. The general purpose of this paper is to extend our knowledge of how Vietnamese listed companies choose their capital structure and to what extent their financing behaviors are consistent with the theoretical explanations, namely the trade-off theory and pecking order theory.2 Problem statement There are three major motivations for the study. First, being not a new research area, capital structure remains one of the most interesting and puzzling ones.
Capital structure refers how a firm uses different sources of funds to finance its operations and growth. It is recognized that financial capital plays a crucially important role in the existence and growth of a firm. Good capital structure decisions not only lead to higher profitability or lower risk but also help firms to allocate risk as well as control power among various groups of shareholders. Since first paper of capital research by Miller and Modigliani in 1958, there has been a vast amount of research on firm capital structure.
However, empirical results are TIEU LUAN MOI download :4skknchat@gmail.com inconsistent in supporting the two most prominent theories of capital structure: the trade-off (Modigliani & Miller, 1963) and the pecking order theory (Myers & Majluf, 1984; Myers, 1984).